3 Signs Your Stock Portfolio Could Lose You a Lot of Money 

Occasionally, I get smalls cut on my hand, sometime on my foot, and I usually have no idea how I get them. These cuts bled a little but most of the time, I don’t really pay any attention to them because they always recover fast enough. As we learned in biology, our body has a magical blood clotting process to stop the cuts from bleeding further. Afterwards, our body will dissolve the blood clots once the cuts are completely healed.

When clots are not dissolved naturally however, it can block your arteries and bring serious danger. A blood clot in the heart may lead to a heart attack and a blood clot in the brain area may lead to a stroke.

Similarly, having a “blood clot” in your stock portfolio carries an imminent degree of risk. If ignored, you could lose their hard-earned money in the stock market.

Here are 3 signs your portfolio could lose you money:

#1 You Have a Celebrity-like Portfolio

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A celebrity-like portfolio simply means that you are buy the same stocks the “guru” investors like Warren Buffett, George Soros, Seth Klarman, Edward Lampert, Jean-Marie Evillard, and any other investment idols you may have, are buying.

What could possible go wrong, right? These guys are the best in the business and surely they pick the right stocks nine times out of ten.

It’s true that these renowned investors make lots of money from their stock picks. But you may not be aware that they possess intangible qualities like emotional stability and patience that may not be as easily copied.

For instance, Buffett was seen accumulating Walmart stock back in 2005 at a prices below $50. For three years after, Walmart’s stock traded sideways. Imagine holding a stock for three years with no returns at all. That would turn most investors off, except Warren Buffett. After a long wait, Walmart had a good run for the past two years crossing $75 a share recently.

And while others might be tempted to lock-in their profits now, Buffett has been accumulating Walmart stock again. From his behavior, he’s probably in for the long term with Wal-Mart. The only question is: How long?

You may have drastically different investment time horizon from Warren Buffett. He may have a 30-year time horizon for a stock, while you might have a five-year one. So you might be able to copy them, but you wouldn’t know their expectations for each individual investment. In short, every investor has different risk appetites, expectation of returns, and investment horizons and they can’t all be easily duplicated.

#2 You’re a Stock Market Shopaholic

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There was one time I saw a lady with her list of investments and the number of stocks she had shocked me. The list was as long as the number of items on my credit card bill except that each of the items (her stocks) amounted to at least a three, four or five-figure sum each.

How on earth did she end up with so many stocks? You probably wouldn’t believe it but she told me that whenever she had excess cash, she would buy a stock she likes or if someone recommend one to her.

The late Steve Jobs once said:

People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”

I can’t agree more with Steve Jobs because this also applies to investing. A “stock market shopaholic” is likely to encounter several issues:

  • It is laborious to monitor so many stocks that its defeats the purpose of investing being a near-passive source of income
  • The amount of brokerage fees incurred is high and will hamper your overall returns. Unless you have at least an eight-figure asset base like a full-time fund manager, it is not going to make sense investing in so many stocks
  • We diversify to reduce risk. However up to a certain point, over-diversifying doesn’t reduce risk anymore at all. Even if one invests in the whole universe of stocks out there, your portfolio is still subjected to the volatility of overall the stock market cycle

#3 You’re Unwilling to Cut Your Losses

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Do you find yourself having ‘junk’ stocks in your portfolio you’re unwilling to cut losses on? In my previous article – 3 Things Your Stockbroker Doesn’t Want You to Know About Penny Stocks – my friend has this one stock, Digiland, in her portfolio since 2007 till today because she’s unwilling to realize her losses.

When mistakes are made, we always hope that the tide will change and one day the stock will climb back upward again. From my experience though, it doesn’t work that way. There’s a reason why a stock is depressed for a long time and chances are, it will continue to stay that way. If you continue to hold on, you are losing the opportunity to make your money back – faster!

Three years ago, I invested in a shipping company called Courage Marine. At that time, it was too far outside my circle of competence. After I realized I made a mistake with Courage Marine, I regretfully cashed out at a 30% loss. I then reinvested what I got into another stock that is making 17% in profit today.

My losses would be far greater today if I continued to hold onto my mistake in Courage Marine.  Instead, I learnt from it, cut my losses and used the proceeds to purchase a better stock. The key lesson here is: Don’t compound your losses, but compound your winners!

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

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